Positive NPV projects enhance shareholders' wealth. However, in some cases the payment of dividends limit the number of positive NPV projects a firm can accept. Why, then shouldn't shareholders prefer a residual dividend policy?© BrainMass Inc. brainmass.com June 3, 2020, 5:21 pm ad1c9bdddf
Since profits vary over time, dividends should also vary. Many stockholders, however, rely on dividends to meet expenses.
Under the residual dividend model, dividends are determined as follows:
1. The firm determines its optimal capital budget;
Residual dividend policy and shareholders are correlated in the solution.